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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 10, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20355
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COSTCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0572969
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(425) 313-8100
(Registrant's telephone number, including area code)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The registrant had 216,476,985 common shares, par value $.01, outstanding at
May 29, 1998.
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<PAGE>
COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
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PAGE
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ITEM 1--FINANCIAL STATEMENTS............................................................................... 3
Condensed Consolidated Balance Sheets.................................................................. 11
Condensed Consolidated Statements of Income............................................................ 12
Condensed Consolidated Statements of Cash Flows........................................................ 13
Notes to Condensed Consolidated Financial Statements................................................... 14
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS.................................................................................. 8
ITEM 2--CHANGES IN SECURITIES.............................................................................. 9
ITEM 3--DEFAULTS UPON SENIOR SECURITIES.................................................................... 9
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 9
ITEM 5--OTHER INFORMATION.................................................................................. 9
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K................................................................... 9
Exhibit (28) Report of Independent Public Accountants.................................................. 18
</TABLE>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of May 10, 1998, and the condensed consolidated
balance sheet as of August 31, 1997, unaudited condensed consolidated statements
of income for the 12- and 36-week periods ended May 10, 1998, and May 11, 1997
and the unaudited condensed consolidated statements of cash flows for the
36-week periods then ended are included elsewhere herein. Also, included
elsewhere herein are notes to the unaudited condensed consolidated financial
statements and the results of the limited review performed by Arthur Andersen
LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1998 is a 52-
week year with period 13 ending on August 30, 1998. The first, second, and third
quarters consist of 12 weeks each and the fourth quarter consists of 16 weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1997 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED MAY 10, 1998 AND MAY 11, 1997 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the third quarter of fiscal 1998 increased 29% to $85,227, or
$0.38 per share (diluted), from $66,265, or $0.31 per share (diluted), during
the third quarter of fiscal 1997.
Net sales increased 10% to $5,241,926 during the third quarter of fiscal
1998 from $4,752,445 during the third quarter of fiscal 1997. This increase was
due to opening a net of 17 new warehouses (19 opened, 2 closed) since the end of
the third quarter of fiscal 1997 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 8 percent during the third quarter of fiscal 1998, reflecting new
marketing and merchandising efforts, including the rollout of various ancillary
businesses to certain existing locations. Changes in prices of merchandise did
not contribute to sales increases.
Membership fees and other revenue increased 15% to $96,160 or 1.83% of net
sales in the third quarter of fiscal 1998 from $83,784 or 1.76% of net sales in
the third quarter of fiscal 1997. Membership fees include membership sign-ups at
the new warehouses opened since the end of the third quarter of fiscal 1997. The
increase in membership fees also reflects a five dollar increase in the annual
membership fee for both Business and Gold Star members effective April 1, 1998
in the United States and May 1, 1998 in Canada.
Gross margin (defined as net sales minus merchandise costs) increased 12% to
$526,171 or 10.04% of net sales in the third quarter of fiscal 1998 from
$469,288 or 9.87% of net sales in the third quarter of fiscal 1997. The 17 basis
point increase in gross margin as a percentage of net sales reflects the
Company's greater purchasing power, expanded use of its depot facilities,
improved fresh foods margins, improved softlines margins, and increased sales
penetration of certain higher gross margin ancillary businesses. The gross
margin figures reflect accounting for merchandise costs on the last-in,
first-out (LIFO) method. The third quarters of fiscal 1998 and 1997 each
included a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.91% during the third quarter of fiscal 1998 from 8.98% during the
third quarter of fiscal 1997. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable
3
<PAGE>
warehouse sales noted above, and a year-over-year expense improvement at the
Company's core warehouse operations and Central and Regional administrative
offices, which was partially offset by higher expenses associated with
international expansion and continued expansion and rollout of certain ancillary
businesses.
Preopening expenses totaled $8,884 or .17% of net sales during the third
quarter of fiscal 1998 compared to $2,458 or 0.05% of net sales during the third
quarter of fiscal 1997. Six warehouses were opened in the third quarter of
fiscal 1998 compared to two new locations opened during last year's third
quarter (including a relocated warehouse). Preopening expenses also includes
costs related to remodels, including expanded fresh foods and ancillary
operations at existing warehouses, as well as costs associated with expanding
international operations.
A provision for warehouse closing costs of $1,500 was recorded in the third
quarter of fiscal 1998 compared to $3,500 in the third quarter of fiscal 1997.
The provisions include estimated closing costs for warehouses closed, and in
fiscal 1998 included closing costs related to the consolidation of certain depot
facilities.
Interest expense totaled $10,477 in the third quarter of fiscal 1998
compared to $14,662 in the third quarter of fiscal 1997. The decrease in
interest expense is primarily due to the Company having no short-term borrowings
under its Commercial Paper programs in the third quarter of fiscal 1998 (See
"Note 2-- Debt").
Interest income and other totaled $7,562 in the third quarter of fiscal 1998
compared to $4,055 in the third quarter of fiscal 1997. The increase primarily
reflects interest earned on higher balances of cash and cash equivalents during
the third quarter of fiscal 1998, as compared to the year-earlier third quarter
period.
The effective income tax rate on earnings in the third quarter of fiscal
1998 was 40.00% compared to 39.50% effective tax rate in the third quarter of
fiscal 1997.
COMPARISON OF THE 36 WEEKS ENDED MAY 10, 1998 AND MAY 11, 1997 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first 36 weeks of fiscal 1998 was $309,146, or $1.37 per
share, compared to net income of $195,524, or $0.93 per share (diluted), during
the first 36 weeks of fiscal 1997. Net income in the first 36 weeks of fiscal
1997 included a non-cash, pretax charge of $65,000 ($38,675 after-tax)
reflecting a provision for the impairment of long-lived assets as required by
the Company's adoption of Statement of Financial Accounting Standard No. 121.
Excluding the $65,000 ($38,675 after-tax) asset impairment charge, net income
for the first thirty-six weeks of fiscal 1997 would have been $234,199, or $1.10
per share (diluted).
Net sales increased 11% to $16,260,280 during the first 36 weeks of fiscal
1998 from $14,685,506 during the first 36 weeks of fiscal 1997. This increase
was primarily due to an increase in comparable warehouse sales and opening a net
of 17 warehouses (19 opened, 2 closed) since the end of the third quarter of
fiscal 1997. Comparable sales, that is sales in warehouses open for at least a
year, increased 8 percent during the first 36 weeks of fiscal 1998, reflecting
new marketing and merchandising efforts, including the rollout of fresh foods
and various ancillary businesses to certain existing locations. Changes in
prices of merchandise did not contribute to sales increases.
Membership fees and other revenue increased to $302,575 or 1.86% of net
sales in the first 36 weeks of fiscal 1998 from $273,024 or 1.86% of net sales
in the first 36 weeks of fiscal 1997. Membership fees include membership
sign-ups at the new warehouses opened since the end of the third quarter of
fiscal 1997. The increase in membership fees also reflects a five dollar
increase in the annual membership fee for both Business and Gold Star members
effective April 1, 1998 in the United States and May 1, 1998 in Canada.
4
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Gross margin (defined as net sales minus merchandise costs) increased 13% to
$1,666,237 or 10.25% of net sales in the first 36 weeks of fiscal 1998 from
$1,474,770 or 10.04% of net sales in the first 36 weeks of fiscal 1997. The 21
basis point increase in gross margin as a percentage of net sales reflects the
Company's greater purchasing power, expanded use of its depot facilities,
improved fresh foods margins, improved softlines margins, and increased sales
penetration of certain higher gross margin ancillary businesses. The gross
margin figures reflect accounting for merchandise costs on the last-in,
first-out (LIFO) method. The first 36 weeks of fiscal 1998 and 1997 each include
a $7,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.71% during the first 36 weeks of fiscal 1998 from 8.78% during
the first 36 weeks of fiscal 1997. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year expense improvement
at the Company's core warehouse operations and Central and Regional
administrative offices, which was partially offset by higher expenses associated
with international expansion and continued expansion and rollout of certain
ancillary businesses.
Preopening expenses totaled $20,298 or 0.12% of net sales during the first
36 weeks of fiscal 1998 compared to $18,743 or 0.13% of net sales during the
first 36 weeks of fiscal 1997. Fifteen warehouses were opened in the first 36
weeks of fiscal 1998 (including one relocated warehouse), compared to thirteen
new locations during the last year's first 36 weeks (including six relocated
warehouses). Preopening expenses also includes costs related to remodels,
including expanded fresh foods and ancillary operations at existing warehouses,
as well as costs associated with expanding international operations.
In the first 36 weeks of fiscal 1998 the Company recorded a pre-tax
provision for warehouse closing costs of $3,500, or $.01 per share on an
after-tax basis (diluted), compared to a pre-tax provision for warehouse closing
costs of $8,500, or $.02 per share on an after-tax basis (diluted) recorded in
the first 36 weeks of fiscal 1997. The provisions included estimated closing
costs for warehouses closed in each respective fiscal year, including closing
costs associated with warehouses which were relocated to new facilities. There
was one warehouse relocated, along with the consolidation of certain depot
facilities, in the first 36 weeks of fiscal 1998 compared to six relocations and
one outright closing in the first 36 weeks of fiscal 1997.
Interest expense totaled $32,365 in the first 36 weeks of fiscal 1998
compared to $50,839 in the first 36 weeks of fiscal 1997. The decrease in
interest expense is primarily related to the call for redemption of the
Company's 6 3/4% ($285, 079 principal amount) and 5 1/2% ($179,338 principal
amount) Convertible Subordinated Debentures during the second quarter of fiscal
1997, and the call for redemption of the Company's 5 3/4% ($300,000 principal
amount) Convertible Subordinated Debentures during the fourth quarter of fiscal
1997. In the aggregate, approximately $302,000 of these three convertible
debentures were converted into common stock (13.1 million shares) and
approximately $462,000 were redeemed for cash. This reduction in debt was offset
by the raising of approximately $450,000 through the issuance of 3 1/2%
($900,000 principal amount at maturity) Zero Coupon Convertible Subordinated
Notes during the fourth quarter of fiscal 1997. The decrease in interest expense
is also due to the Company having no short-term borrowings under its Commercial
Paper programs in the third quarter of fiscal 1998 (See "Note 2-- Debt").
Interest income and other totaled $19,025 in the first 36 weeks of fiscal
1998 compared to $11,177 in the first 36 weeks of fiscal 1997. This increase
primarily reflects interest earned on higher balances of cash and cash
equivalents during the first 36 weeks of fiscal 1998.
The effective income tax rate on earnings in the first 36 weeks of fiscal
1998 was 40.00% compared to a 40.16% effective tax rate in the first 36 weeks of
fiscal 1997. The decrease in the effective tax rate was related primarily to
decreases in foreign taxes.
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
The discussion below contains forward-looking statements that involve risks
and uncertainties, and should be read in conjunction with the Company's reports
filed previously with the Securities and Exchange Commission. Actual results may
differ materially.
EXPANSION PLANS
Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $425,000 to $475,000 during
fiscal 1998 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $100,000 to $125,000 for international expansion, including the
United Kingdom, Asia, Mexico and other potential ventures. These expenditures
will be financed with a combination of cash provided from operations, the use of
cash and cash equivalents (which totaled $391,682 at May 10, 1998), short-term
borrowings under revolving credit facilities, and/or commercial paper facilities
and other financing sources as required. A total of approximately $367,000 has
been spent on capital expenditures during the first 36 weeks of fiscal 1998,
which includes the acquisition costs of seven sites in Michigan from the
Hechinger Company, a home improvement warehouse operation.
On May 4, 1998, the Company announced the formation of a joint venture in
the Republic of Korea with Shinsegae Department Store Co., Ltd. ("Shinsegae") to
acquire the membership warehouse club operation from Shinsegae. The joint
venture operation became effective on June 1, 1998. Initial capitalization of
the joint venture totaled approximately $100,000, with the company being a
93.75% owner and Shinsegae being a 6.25% owner. Approximately $80,000 of the
initial investment will be used for land and building acquisitions, and the
remaining approximately $20,000 will be used to purchase merchandise inventories
and other assets, and for working capital purposes (See "Note 5--Subsequent
Events").
On May 28, 1998, the Company announced the signing of a lease by its
wholly-owned Japan subsidiary, Costco Wholesale Japan, Ltd., for the lease of
land and construction of a Costco warehouse in Fukuoka, Japan. The term of the
lease is 20 years. The warehouse is scheduled to open in late April 1999.
Expansion plans for the United States and Canada during fiscal 1998 are to
open approximately 16 to 17 new warehouse clubs, including five locations
acquired from the Hechinger Company (noted above), as well as one or two
relocations of existing warehouses to larger and better-located warehouses.
Through the end of the first 36 weeks of fiscal 1998, the Company has opened 12
warehouses in the United States (including the relocation of its Pomona,
California warehouse to Chino Hills, California), two warehouses in Canada, and
one warehouse in the United Kingdom. The Company also consolidated several of
its Southern California distribution (depot) facilities into a larger,
state-of-the-art facility in Mira Loma, California in the second quarter of
fiscal 1998. The Company also expects to continue expansion of its international
operations and plans to open one or two additional units in the United Kingdom
through its 60%-owned subsidiary during the next year. Other international
markets are being assessed.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of May 10, 1998,
Price Club Mexico operated 14 Price Club warehouses in Mexico, with two
additional units in Mexico planned to open prior to calendar year-end.
6
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BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN
US DOLLARS)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 25, 1999, and $250,000 expires on January 30, 2001. At May
10, 1998, no amount was outstanding under the loan facility or the commercial
paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, which expires in March 1999. At May 10, 1998, no amount was outstanding
under the bank credit facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $281,000. The outstanding
commitments under these facilities at May 10, 1998 totaled approximately
$152,000, including approximately $50,000 in standby letters of credit for
workers' compensation requirements.
DERIVATIVES
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on inventory purchases. The amount of interest
rate and foreign exchange contracts outstanding at quarter-end or in place
during the first 36 weeks of fiscal 1998 were immaterial to the Company's
results of operations or its financial position.
YEAR 2000
The Company uses a number of computer software programs and operating
systems that were not originally designed to process dates beyond the year 1999.
The Company has implemented a project to ensure that the Company's systems will
function properly in the year 2000 and thereafter. The Company anticipates
completing this project for key systems in early 1999 and believes that, with
modifications to its existing software and systems and/or conversions to new
software, the year 2000 issue will not present significant operational problems.
The estimated direct costs of the Company's year 2000 project are not material
to the Company's financial position or results of operations. Additional systems
currently under review may require further resources; however, the Company does
not expect any cost increases to have a material effect on its results of
operations.
The Company is also in contact with its significant suppliers and vendors
with which its systems interface and exchange data or upon which its business
depends. These efforts are designed to minimize the extent to which the
Company's business will be vulnerable in the event of the failure of these third
parties to remediate their own year 2000 issues. There can be no assurance that
such third parties on which the Company's business relies will successfully
remediate their systems on a timely basis. The Company's business, financial
condition or results of operations could be adversely affected by the failure of
its systems or those operated by other parties to operate properly beyond the
year 1999 or to otherwise deal with year 2000 issues. To the extent possible,
the Company is developing contingency plans designed to allow continued
operation in the event of a failure of third party systems or products.
7
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FINANCIAL POSITION AND CASH FLOWS
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables in relation to inventory than generally
encountered in other forms of retailing. When combined with other current
liabilities, the resulting amount typically approaches or exceeds the current
assets needed to operate the business (e.g., merchandise inventories, accounts
receivable and other current assets). Working capital totaled approximately
$358,000 at May 10, 1998 compared to $146,000 at August 31, 1997.
Net cash provided by operating activities totaled $510,403 in the first 36
weeks of fiscal 1998 compared to $368,041 in the first 36 weeks of fiscal 1997.
The increase in net cash from operating activities is primarily a result of
increased net income, adjusted for the non-cash provision for asset impairments,
and decreased owned inventory (inventory less trade payables) during the first
36 weeks of fiscal 1998 compared to the first 36 weeks of fiscal 1997.
Net cash used in investing activities totaled $320,194 in the first 36 weeks
of fiscal 1998 compared to $374,410 in the first 36 weeks of fiscal 1997. The
investing activities primarily relate to additions to property and equipment for
new and remodeled warehouses of $366,609 and $391,008 in the first 36 weeks of
fiscal 1998 and 1997, respectively. The Company opened 15 warehouses (including
one relocation) in the first 36 weeks of fiscal 1998 compared to 13 warehouses
(including six relocations) opened in the first 36 weeks of fiscal 1997.
Net cash provided by financing activities totaled $27,824 in the first 36
weeks of fiscal 1998 compared to $39,775 in the first 36 weeks of fiscal 1997.
The Company's balance sheet as of May 10, 1998 reflects a $576,184 or 11%
increase in total assets since August 31, 1997. The increase is primarily due to
higher cash and merchandise inventory balances and a net increase in property
and equipment primarily related to the Company's expansion program.
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
On April 6, 1992, The Price Company was served with a Complaint in an action
entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United
States District Court, Southern District of California (the "Court").
Subsequently, on April 22, 1992, The Price Company was served with a First
Amended Complaint in the action. The case was dismissed without prejudice by the
Court on September 21, 1992, on the grounds the plaintiffs had failed to state a
sufficient claim against defendants. Subsequently, plaintiffs filed a Second
Amended Complaint which, in the opinion of The Price Company's counsel, alleged
substantially the same facts as the prior complaint. The Complaint alleged
violation of certain state and federal laws during the time period prior to The
Price Company's earnings release for the second quarter of fiscal year 1992. The
case was dismissed with prejudice by the Court on March 9, 1993, on grounds the
plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs
filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated
November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. In
February 1997, the Court granted the plaintiffs' motion for certification of a
class consisting of all purchasers of the common stock of The Price Company from
April 3, 1991 through April 2, 1992. In May 1998, the parties reached an
agreement in principle to resolve the lawsuit. The agreement is subject to final
documentation and court approval. The Company's estimated portion of the
proposed settlement amount is not material to the Company's financial position
or results of operations.
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
8
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ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended May 10, 1998.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COSTCO COMPANIES, INC.
REGISTRANT
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Date: June 11, 1998 ---------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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Date: June 11, 1998 ---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCFIAL OFFICER
</TABLE>
10
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COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31,
MAY 10, 1998 1997
------------ --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 391,682 $ 175,508
Receivables, net................................................................... 156,452 147,133
Merchandise inventories, net....................................................... 1,887,707 1,686,525
Other current assets............................................................... 82,177 100,784
------------ --------------
Total current assets......................................................... 2,518,018 2,109,950
------------ --------------
PROPERTY AND EQUIPMENT
Land and land rights............................................................... 1,126,517 1,094,607
Buildings and leasehold and land improvements...................................... 2,150,632 1,933,740
Equipment and fixtures............................................................. 923,829 840,578
Construction in progress........................................................... 29,591 81,417
------------ --------------
4,230,569 3,950,342
------------ --------------
------------ --------------
Less-accumulated depreciation and amortization..................................... (901,816) (795,708)
------------ --------------
Net property and equipment..................................................... 3,328,753 3,154,634
------------ --------------
OTHER ASSETS....................................................................... 205,727 211,730
------------ --------------
$6,052,498 $ 5,476,314
------------ --------------
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding............................................................ $ 7,600 $ 14,930
Short-term borrowings.............................................................. -- 25,460
Accounts payable................................................................... 1,575,798 1,379,379
Accrued salaries and benefits...................................................... 325,733 302,681
Accrued sales and other taxes...................................................... 101,495 90,774
Other current liabilities.......................................................... 149,405 150,823
------------ --------------
Total current liabilities.......................................................... 2,160,031 1,964,047
LONG-TERM DEBT..................................................................... 924,143 917,001
DEFERRED INCOME TAXES AND OTHER LIABILITIES........................................ 44,297 38,967
------------ --------------
Total liabilities............................................................ 3,128,471 2,920,015
------------ --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.................................................................. 99,285 88,183
------------ --------------
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and
outstanding...................................................................... -- --
Common stock $.01 par value; 900,000,000 shares authorized; 216,422,000 and
213,593,000 shares issued and outstanding........................................ 2,164 2,136
Additional paid-in capital......................................................... 782,084 706,324
Accumulated foreign currency translation........................................... (106,734) (78,426)
Retained earnings.................................................................. 2,147,228 1,838,082
------------ --------------
Total stockholders' equity................................................... 2,824,742 2,468,116
------------ --------------
$6,052,498 $ 5,476,314
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
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COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
-------------------------- ----------------------------
MAY 10, 1998 MAY 11, 1997 MAY 10, 1998 MAY 11, 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Net sales.......................................... $5,241,926 $4,752,445 $ 16,260,280 $ 14,685,506
Membership fees and other.......................... 96,160 83,784 302,575 273,024
------------ ------------ ------------- -------------
Total revenue.................................... 5,338,086 4,836,229 16,562,855 14,958,530
OPERATING EXPENSES
Merchandise costs.................................. 4,715,755 4,283,157 14,594,043 13,210,736
Selling, general and administrative................ 466,987 426,980 1,416,430 1,289,119
Preopening expenses................................ 8,884 2,458 20,298 18,743
Provision for impaired assets and warehouse closing
costs............................................ 1,500 3,500 3,500 73,500
------------ ------------ ------------- -------------
Operating income................................. 144,960 120,134 528,584 366,432
OTHER INCOME (EXPENSE)
Interest expense................................... (10,477) (14,662) (32,365) (50,839)
Interest income and other.......................... 7,562 4,055 19,025 11,177
------------ ------------ ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES........... 142,045 109,527 515,244 326,770
Provision for income taxes......................... 56,818 43,262 206,098 131,246
------------ ------------ ------------- -------------
NET INCOME......................................... $ 85,227 $ 66,265 $ 309,146 $ 195,524(a)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Basic............................................ $ 0.39 $ 0.31 $ 1.44 $ 0.95
Diluted.......................................... $ 0.38 $ 0.31 $ 1.37 $ 0.93(a)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Shares used in calculation (000's)
Basic............................................ 215,913 211,477 214,779 204,864
Diluted.......................................... 232,378 215,582 230,808 216,931
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
- ------------------------
(a) Net income and net income per common and common equivalent share (diluted)
would have been $234,199 and $1.10, respectively, without the effect of
adopting FAS No. 121, using 224,204 diluted shares.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 WEEKS ENDED
--------------------------
MAY 10, 1998 MAY 11, 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................... $ 309,146 $ 195,524
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 141,851 122,429
Provision for asset impairments.................................................... -- 65,000
Increase in merchandise inventories................................................ (209,883) (150,123)
Increase in accounts payable....................................................... 202,694 90,615
Other.............................................................................. 66,595 44,596
------------ ------------
Total adjustments................................................................ 201,257 172,517
------------ ------------
Net cash provided by operating activities.......................................... 510,403 368,041
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................................................. (366,609) (391,008)
Proceeds from the sale of property and equipment..................................... 49,170 19,416
Other................................................................................ (2,755) (2,818)
------------ ------------
Net cash used in investing activities.............................................. (320,194) (374,410)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings................................ (24,940) 167,751
Decrease in bank checks outstanding.................................................. (7,133) (16,039)
Net proceeds from long-term borrowings............................................... 2,338 2,570
Payments on long-term debt and notes payable......................................... (5,489) (169,618)
Proceeds from minority interests, net................................................ 9,660 16,545
Exercise of stock options............................................................ 53,388 38,566
------------ ------------
Net cash provided by financing activities.......................................... 27,824 39,775
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. (1,859) 1,299
------------ ------------
Net increase in cash and cash equivalents.......................................... 216,174 34,705
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 175,508 101,955
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 391,682 $ 136,660
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)(a)........................................... $ 17,891 $ 55,791
Income taxes....................................................................... 174,731 126,178
</TABLE>
- ------------------------
(a) Interest on the 3 1/2% ($900 million principal amount at maturity) Zero
Coupon Subordinated Notes requires no cash payments; rather the principal
accretes to full value at maturity. Semi-annual interest payments on the
5 1/2% and 6 3/4% convertible debentures were paid on September 3, 1996,
subsequent to the beginning of the first quarter of fiscal 1997, which began
September 2, 1996. These debentures were redeemed during fiscal 1997.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco"
or the "Company"). Costco is a holding company which operates primarily through
its major subsidiaries, The Price Company and subsidiaries, and Costco Wholesale
Corporation and subsidiaries. All intercompany transactions between the Company
and its subsidiaries have been eliminated in consolidation. Costco primarily
operates membership warehouses under the "Costco Wholesale" name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally-branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. As of May 10, 1998, Costco operated 275 warehouses clubs: 211 in the
United States (24 states); 56 in Canada (in nine Canadian provinces); seven in
the United Kingdom; and one warehouse in Taiwan. As of May 10, 1998, the Company
also operated (through a 50%-owned joint venture) 14 warehouses in Mexico, and
had a license agreement for the operation of two membership warehouses in Korea
(See "Note 5--Subsequent Events").
The Company's investment in the Price Club Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended August 31, 1997.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1998 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 30, 1998, consisting of 16 weeks.
MERCHANDISE INVENTORIES
Merchandise inventories are recorded at the lower of cost or market as
determined by the retail inventory method, and are stated using the last-in,
first-out (LIFO) method for U.S. merchandise inventories, and the first-in,
first-out (FIFO) method for foreign merchandise inventories. If the FIFO method
had been used, merchandise inventory would have been $23,650 higher at both May
10, 1998 and May 11, 1997.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of physical inventory counts
which generally occur in the second and fourth fiscal quarters.
14
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In the second quarter of fiscal 1998, the Company adopted the Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" (SFAS No.
128). SFAS No. 128 established new standards for computing and presenting
earnings per share (EPS) for entities with publicly-held common stock.
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
-------------------------- --------------------------
MAY 10, 1998 MAY 11, 1997 MAY 10, 1998 MAY 11, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common stockholders used in
basic EPS............................................. $ 85,227 $ 66,265 $ 309,146 $ 195,524
Interest on convertible bonds, net of tax............... 2,198 -- 6,594 5,855
------------ ------------ ------------ ------------
Net income available to common stockholders after
assumed conversions of dilutive securities............ $ 87,425 $ 66,265 $ 315,740 $ 201,379
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares used in basic
EPS................................................... 215,913 211,477 214,779 204,864
Stock options........................................... 6,246 4,105 5,810 3,547
Conversion of convertible bonds......................... 10,219 -- 10,219 8,520
------------ ------------ ------------ ------------
Weighted number of common shares and dilutive potential
common stock used in diluted EPS...................... 232,378 215,582 230,808 216,931
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The 5 3/4% debentures convertible into 7,273 common shares were not included
in computing diluted EPS for the 36 weeks ended in fiscal 1997 because their
effect was antidilutive.
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS No. 121), as of the first quarter of fiscal 1997. In
accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of
$65,000 reflecting its estimate of impairment relating principally to excess
property and closed warehouses. The charge reflects the difference between
carrying value and fair-market value, which was based on market valuations for
those assets whose carrying value was not recoverable through future cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
15
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 15, 1999, and $250,000 expires on
January 30, 2001. At May 10, 1998, no amount was outstanding under the loan
facility or the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, which expires in March 1999. At May 10, 1998, no amount was outstanding
under the bank credit facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $281,000. The outstanding
commitments under these facilities at May 10, 1998 totaled approximately
$152,000, including approximately $50,000 in standby letters of credit for
workers' compensation requirements.
NOTE (3)--INCOME TAXES
The following is a reconciliation of the federal statutory income tax rate
to the effective income tax rate for income before income taxes:
<TABLE>
<CAPTION>
36 WEEKS ENDED 36 WEEKS ENDED
MAY 10, 1998 MAY 11, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Federal statutory income tax rate................................... $ 180,336 35.00% $ 114,370 35.00%
State, foreign and other income taxes, net.......................... 25,762 5.00% 16,876 5.16%
---------- --------- ---------- ---------
$ 206,098 40.00% $ 131,246 40.16%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
NOTE (4)--COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations. See Legal Proceedings on page 8 for
outstanding legal matters.
NOTE (5)--SUBSEQUENT EVENTS
On May 4, 1998, the Company announced the formation of a joint venture in
the Republic of Korea with Shinsegae Department Store Co., Ltd. ("Shinsegae") to
acquire the membership warehouse club operation from Shinsegae. On June 1, 1998
the joint venture transaction was completed. The operation being purchased by
the joint venture operates three membership warehouse clubs under the name Price
16
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (5)--SUBSEQUENT EVENTS (CONTINUED)
Club Korea. Since 1993, Shinsegae has operated the Price Club Korea operation
under a license agreement with Costco. Initial capitalization of the joint
venture totaled approximately $100,000, with Costco being a 93.75% owner and
Shinsegae being a 6.25% owner. Approximately $80,000 of the initial investment
will be used for land and building acquisitions, and the remaining approximately
$20,000 will be used to purchase merchandise inventories and other assets, and
for working capital purposes.
On May 28, 1998, the Company announced the signing of a lease by its
wholly-owned Japan subsidiary, Costco Wholesale Japan, Ltd., for the lease of
land and construction of a Costco warehouse in Fukuoka, Japan. The term of the
lease is 20 years. The warehouse is scheduled to open in late April 1999.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-30-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-10-1998
<CASH> 391,682
<SECURITIES> 0
<RECEIVABLES> 160,602
<ALLOWANCES> 4,150
<INVENTORY> 1,887,707
<CURRENT-ASSETS> 2,518,018
<PP&E> 4,230,569
<DEPRECIATION> 901,816
<TOTAL-ASSETS> 6,052,498
<CURRENT-LIABILITIES> 2,160,031
<BONDS> 924,143
0
0
<COMMON> 784,248
<OTHER-SE> 2,040,494
<TOTAL-LIABILITY-AND-EQUITY> 6,052,498
<SALES> 16,260,280
<TOTAL-REVENUES> 16,562,855
<CGS> 14,594,043
<TOTAL-COSTS> 16,034,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,365
<INCOME-PRETAX> 515,244
<INCOME-TAX> 206,098
<INCOME-CONTINUING> 309,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309,146
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.37
</TABLE>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Companies, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of May 10,
1998, and the related condensed consolidated statements of income for the
twelve-week and thirty-six-week periods ended May 10, 1998 and May 11, 1997, and
the condensed consolidated statements of cash flows for the thirty-six-week
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
May 29, 1998
18
